Working Paper: NBER ID: w29650
Authors: Jing Xing; Katarzyna A. Bilicka; Xipei Hou
Abstract: We investigate the impact of tax cascading on upstream and downstream firms. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, which effectively removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service firms. These changes are mainly driven by increased outsourcing from manufacturing firms, and are unlikely to be caused by changes in firms’ tax burden or output prices. Our study provides new evidence on how taxation affects supplier networks and firm performance.
Keywords: turnover taxes; VAT; China; business decisions; outsourcing
JEL Codes: D25; H25; H32; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| b2v reform (E69) | sales increase (F61) |
| sales increase (F61) | R&D investment increase (O39) |
| sales increase (F61) | employment increase (J68) |
| b2v reform (E69) | improved innovation quality (O36) |
| smaller manufacturing firms outsourcing (L69) | larger service firms benefiting (L84) |